Briefing document C-270/24 (Granulines Invest) – VAT deductions cannot be denied without proof of fraud or substantial evidence

BRIEFING DOCUMENT: ANALYSIS OF COURT OF JUSTICE OF THE EUROPEAN UNION ORDER – CASE C-270/24 (GRANULINES INVEST KFT. V. NEMZETI ADÓ- ÉS VÁMHIVATAL FELLEBBVITELI IGAZGATÓSÁGA)

Date: 14 February 2025 (Order Date) Case Reference: C-270/24 Parties: Granulines Invest Kft. (Appellant) v. Nemzeti Adó- és Vámhivatal Fellebbviteli Igazgatósága (Hungarian Tax and Customs Administration) Subject Matter: Request for a preliminary ruling concerning the interpretation of EU VAT Directive 2006/112/CE regarding the right to deduct input VAT, refusal of deduction, fraud, proof, the use of a reseller to benefit from a credit program, and mandatory information on invoices.

I. EXECUTIVE SUMMARY

This Order of the Court of Justice of the European Union (CJEU) addresses a preliminary ruling request from a Hungarian court regarding the refusal of VAT deduction by the Hungarian tax authorities to Granulines Invest Kft. The case revolves around Granulines Invest using a Hungarian reseller (CastorFit Gym Kft.) to purchase machinery from foreign manufacturers, primarily to qualify for a domestic interest-free credit program. The Hungarian tax authority refused Granulines Invest’s VAT deduction, alleging the transaction was fictitious and constituted tax fraud, citing several factors including the reseller’s limited role, direct delivery from the manufacturer, a false delivery date on the invoice, and an allegedly excessive price.

The CJEU, applying its established jurisprudence, reiterates the fundamental principle of VAT neutrality and the right to deduct input VAT. It clarifies that the refusal of this right must be based on objective evidence establishing VAT fraud or the taxpayer’s knowledge or obligation to know of such fraud. The Order emphasizes that certain irregularities cited by the tax authorities, such as the reseller’s limited role, motivation by a credit program, an allegedly excessive price, or a false delivery date on the invoice, are not sufficient on their own to prove fraud. The CJEU also rules that minor formal defects in an invoice, specifically concerning the date of supply, should not lead to the denial of VAT deduction if the tax authorities possess the necessary information to verify the material conditions of the right to deduct.

II. BACKGROUND OF THE DISPUTE

Granulines Invest, a Hungarian company trading in waste, initially intended to purchase a machine directly from a German manufacturer. To benefit from a Hungarian interest-free credit program for SMEs (which did not allow direct foreign purchases), Granulines Invest arranged to purchase the machine through a Hungarian reseller, CastorFit. Granulines Invest received an invoice from CastorFit and deducted the corresponding VAT. The Hungarian tax authority subsequently denied this deduction and imposed a 200% tax penalty, arguing that the transaction with CastorFit was fictitious and a scheme to circumvent tax laws, constituting tax fraud.

The tax authority based its decision on several observations:

Granulines Invest had initially dealt directly with the foreign manufacturer.
CastorFit, the reseller, had no employees, and its role was limited to invoicing.
The machines were delivered directly from the manufacturer to Granulines Invest’s premises.
The date of delivery on the invoice (November 16, 2016) was false, as actual deliveries occurred in December 2016 and January 2017.
The price on the invoice included a significant margin (31.5%) deemed excessive for CastorFit’s limited role.
CastorFit had only partially and late fulfilled its tax obligations.

Granulines Invest challenged this decision, arguing the transaction was economically rational and aimed at meeting credit program conditions, not tax evasion. The Hungarian referring court initially annulled the tax authority’s decision, finding insufficient evidence of fraud and upholding the principle of fiscal neutrality regarding commercial choices. However, the Hungarian Supreme Court (Kúria) annulled this judgment and remitted the case, requiring the referring court to re-examine all circumstances and the VAT deduction before the actual delivery date based on an unrectified invoice.

Facing divergent national legal interpretations regarding the scope of its review, the Hungarian court referred questions to the CJEU.

III. KEY EU LAW PROVISIONS CITED

VAT Directive 2006/112/CE:Article 167: Right to deduction arises when the deductible tax becomes chargeable.
Article 168: Assujetti (taxable person) has the right to deduct input VAT on goods/services used for taxed operations.
Article 178: Conditions for exercising the right to deduction, including holding a valid invoice (for goods/services from another taxable person).
Article 219: Defines documents equivalent to an invoice (credit notes, etc.).
Article 220(1): Obligation for taxable persons to issue invoices.
Article 226: Mandatory information on invoices, specifically:
Point 6: Quantity and nature of goods/services.
Point 7: Date of supply/service completion if different from invoice date.
Article 273: Allows Member States to impose obligations necessary for correct VAT collection and fraud prevention, provided they don’t go beyond what is necessary or undermine VAT neutrality.
Charter of Fundamental Rights of the European Union:Article 47: Right to an effective remedy and a fair trial (referenced but found inadmissible by the CJEU in this context due to lack of specific reasoning by the referring court).
General Principles of EU Law: Fiscal Neutrality, Proportionality, Effectiveness, Legal Certainty (Legal certainty found inadmissible by the CJEU).

IV. ANALYSIS OF MAIN THEMES AND IDEAS

Right to Deduct VAT as a Fundamental Principle (Paras 34-37): The CJEU reiterates that the right to deduct input VAT is a cornerstone of the common VAT system and cannot, in principle, be limited if the material and formal requirements are met. This right ensures VAT neutrality for businesses.
Material Conditions for VAT Deduction (Paras 37, 39-41): The essential material conditions are:
- The person claiming the deduction is a “taxable person.”
- The goods or services are used for the taxable person’s taxed output transactions.
- The upstream supply of goods or services was made by another taxable person.
- Crucially, the supply of goods or services described on the invoice must have actually taken place.
- In the present case, the CJEU notes that it is undisputed that the goods were delivered to Granulines Invest and used for its taxed operations, and that both Granulines Invest and CastorFit were taxable persons. This means the material conditions were prima facie met.

Formal Conditions for VAT Deduction (Paras 37, 62-63): Holding a valid invoice, compliant with the requirements of the VAT Directive (e.g., Article 226), is a formal condition for exercising the right to deduct. Article 226(7) specifically requires the date of supply if different from the invoice date.
Fraud, Tax Evasion, and Abuse (Paras 38, 42-43): The fight against fraud and abuse is a recognized objective. National authorities can refuse the right to deduct if it is established, based on objective evidence, that the right is claimed fraudulently or abusively. This applies if the taxable person committed the fraud or knew or should have known that their transaction was involved in VAT fraud.
Proof of Fraud (Paras 44-45, 58-59): The burden of proving fraud lies with the tax authorities, in accordance with national rules of evidence, but these rules must not impair the effectiveness of EU law. Refusal of deduction is only permissible if, after a comprehensive assessment of all facts and circumstances, fraud is established with sufficient legal certainty, “otherwise than by suppositions”.
Assessment of Specific Circumstances Cited by Hungarian Authorities: The CJEU scrutinizes the reasons given by the Hungarian tax authorities for alleging fraud:
- “Fictitious” Contract/Invoicing by Reseller (Paras 46-47): The CJEU acknowledges the reseller’s limited role and direct delivery from the manufacturer. It leaves it to the national court to assess if the contract is fictitious under national civil law. However, it explicitly states: “…the fictitious nature of such a contract, even if established, does not in itself constitute proof of the existence of VAT fraud or an abuse of rights.” (Para 47)
- Transaction motivated by Credit Program as “Exercise of a Right Contrary to its Purpose” (Paras 48-51): The CJEU recalls that taxable persons are generally free to choose organizational structures to limit tax burdens. Abuse only occurs with “purely artificial arrangements, devoid of economic reality, made solely to obtain a tax advantage whose grant would be contrary to the objectives of the VAT Directive.” (Para 49). It concludes that EU law opposes classifying a transaction motivated by benefiting from a credit program as “exercise of a right contrary to its purpose” and denying deduction on that basis, unless it is established that the transaction’s sole or essential purpose was to obtain a tax advantage contrary to the Directive’s objectives. In this case, the tax authority itself noted the credit program objective, suggesting the tax advantage was not the sole or essential aim (Para 51).
- Excessive Price and Partial/Late Tax Payment by Reseller (Paras 52-54): The CJEU states that “the excessive price of a supply of goods, even if established… cannot in itself justify the refusal of the right to deduct VAT to the detriment of the taxable person.” (Para 53). Furthermore, partial and late payment of VAT by the invoice issuer, provided the declared amounts were correct, is not in itself VAT fraud (Para 54).
- False Date of Supply on Invoice (Paras 55-57): The CJEU finds that a false date of supply on an invoice for a delivery that did occur, even if intentional, “does not in itself constitute proof of the existence of VAT fraud.” (Para 56). It notes that in this case, the false date might have been intended to meet credit program deadlines, which is not VAT fraud (Para 57).
Formal Defects and the Principle of Neutrality (Paras 64-74): The CJEU emphasizes that the principle of VAT neutrality requires deduction to be granted if material conditions are met, “even if certain formal requirements have been omitted by the taxable persons.” (Para 64). If the tax authority has “all the necessary data” to verify the material conditions, it cannot impose additional conditions that would nullify the right to deduct (Para 65). The authority must consider supplementary information provided by the taxable person, not just the invoice (Para 66).
- Specifically on the False Date (Article 226(7)): The CJEU rules that Article 178(a) of the VAT Directive “opposes the refusal of the right to reclaim VAT solely on the ground that the taxable person holds an invoice which does not satisfy the conditions required by Article 226(7) of that directive, even if that administration has all the information necessary to enable it to verify that the material conditions for exercising that right are satisfied.” (Para 74).
- Rectification of Invoice (Paras 69-71, 74): Rectification of the invoice is not a prerequisite for exercising the right to deduct if the taxable person has provided information allowing the tax authority to verify the material conditions and the correct date of supply. The correct date, once established, is the relevant date for determining when the right to deduction arises under Article 167.

Penalties for Formal Non-Compliance (Paras 72-73): While refusal of deduction for formal defects is restricted, Member States can impose proportionate fines or financial penalties for failure to comply with formal requirements, provided these measures don’t go beyond what is necessary or undermine VAT neutrality.

V. MOST IMPORTANT FACTS AND CONCLUSIONS

The fundamental right to deduct VAT cannot be easily denied; it requires proof of actual fraud or knowing participation in fraud.
The Hungarian tax authority’s reasoning for alleging fraud (reseller’s limited role, direct delivery, motivation by credit program, excessive price, partial/late tax payment by reseller, false delivery date) are not sufficient on their own to establish fraud justifying the refusal of VAT deduction. A comprehensive assessment of all circumstances is required to prove fraud.
The motivation of a transaction by the desire to benefit from a credit program is not an “exercise of a right contrary to its purpose” justifying denial of deduction, unless the sole or essential purpose was to obtain a VAT advantage contrary to the Directive’s objectives.
Formal invoice defects, such as a false date of supply (Article 226(7)), cannot be the sole basis for denying VAT deduction if the tax authority possesses information allowing verification of the material conditions.
Rectification of such a defective invoice is not a prerequisite for exercising the right to deduction if the taxable person provides the necessary information.
Member States may impose proportionate penalties for formal non-compliance, but not deny the fundamental right to deduction based solely on such defects when material conditions are met and verifiable.

VI. RULING (OPERATIVE PART)

The Court (Sixth Chamber) ordered that:

The VAT Directive, read in conjunction with the principles of fiscal neutrality, effectiveness, and proportionality, opposes a practice by which a tax authority refuses a taxable person’s right to deduct VAT for goods acquired (where the goods were delivered, used for taxed operations, and invoiced) based on the invoice being fictitious because the supply was not made by the invoice issuer, the issuer was involved to meet credit program conditions, the price was excessive/tax paid partially and late by the issuer, and the invoice had a false delivery date. Such refusal requires sufficient legal proof that the taxable person actively participated in VAT fraud or knew/should have known the invoice issuer committed such fraud.
Article 178(a) of the VAT Directive opposes the refusal of the right to reclaim VAT solely because an invoice does not meet the requirements of Article 226(7) (date of supply) if the tax authority has all necessary information to verify the material conditions. Invoice rectification is not a condition for exercising this right if the taxable person has provided that information.

This Order provides significant clarity on the limitations of national tax authorities in denying VAT deduction based on perceived irregularities or complex transaction structures, strongly upholding the principles of VAT neutrality and the requirement for concrete proof of fraud.